Wednesday, December 5, 2012

Two More School Districts Facing Debt Decisions

Update Friday Dec. 7: Make that at least three school districts getting ready to issue new bonds with so-far-unknown structures. The McKinleyville Press blog reports today that the Northern Humboldt Union School District is scheduled to vote Tuesday night on issuing more bonds. (Voters approved that borrowing in a 2010 election. The two districts mentioned in our original post below got voter approval last month.)

Other school districtcs out there with more bond authority from past elections might also be getting on the bond train any time -- if you want to know what's going in your school district, this ia a good time to ask. It's especially timely because apparently, unless school district trustees ask some very specific questions before they vote, they might not be told whether their particular bond package will include some offerings that will one day cost taxpayers 10 times than what the schools borrowed, or even more. Seems like a good time to ask for the fine print.

Original post: Fortuna Union High School District trustees are getting ready to issue $3.5 million in school bonds, and the package they're scheduled to review next week includes the kind of bonds that can pile up hefty debt stretched out for years.

Similar bonds have triggered scandals in some Southern California school districts, and several Humboldt County districts are on the hook to repay five, seven or even 10 times what they've borrowed. (See "The Big Borrow" in this week's Journal.)

It's not uncommon for school boards to agree to large bond packages without ever asking whether they include these capital appreciation bonds, known as CABs, or how much will be repaid in relation to what was borrowed, according to Jon Isom, who with his brother Greg Isom advises many Humboldt area schools on bond issues.

The brothers, under the name Isom Associates, work for Urban Futures Incorporated, a government finance consulting firm. Jon Isom said that until recently, school trustees primarily focused on the big picture -- how much their districts would spend each year to repay their bonds, and whether that would keep taxes around the levels they promised in school bond elections. They didn't drill down to individual bonds that can come with steep price tags.

But he expects that could change in Humboldt, at least for now, as his firm advises Fortuna and Arcata school districts on upcoming bond sales.

Fortuna superintendent Glen Senestraro hadn't known too much about different kinds of school bonds before the Journal phoned him up today, but he has already started asking questions.

He read over the proposed resolution on next week's agenda, huddled with Jon Isom and then e-mailed the Journal that "CABs are in the resolution, but right now there is no intention of using any of those."

The Arcata Elementary School District, which could issue bonds early next year, has been following the flurry of interest in high-repayment bonds, and Superintendent Pam Jones said that along with working with Isom, she plans to consult with county Treasurer John Bartholomew.

"We're trying to be very careful with this," she said, and "the county treasurer can give us some good advice."

From Bartholomew, she can likely expect an earful.

"Capital appreciation bonds are horror stories for the long-term maturity CABs," he said on the telephone this afternoon. Much safer are the current interest bonds, known as CIBs, which pay interest regularly so that big payoffs don't land years down the road.

The state association of county treasurers wants California to pass a law that would ban the riskier bonds that drag repayment out beyond 25 years. That could smack down deals like the one made last year by the McKinleyville Union School District, which authorized the sale of $7 million in bonds that would cost the district $71.6 million by the time all of them mature in 2050, although some could be paid off sooner without penalty.

Bartholomew sent McKinleyville's then-superintendent an alarmed email the day he found out about the terms of those bonds -- information that comes to him because his office collects the taxes that will pay for the bonds.

"I feel compelled to comment that I am appalled by its long-term costs," he wrote in February 2011, particularly because the bond issue was approved so narrowly. And projections about the size of the tax base that would one day exist to pay off the bonds seemed so optimistic he merely wrote "yikes!"

He encouraged McKinleyville to keep looking for ways to refinance that debt.

(Want to look up whether your school district has any capital appeciation bonds, and what the terms are? You can do a search on the Electronic Municipal Market Access website.)